Can the Japanese yen recover against the pressure from the USD?

USD/JPY is significantly influenced by the monetary policy outlook of both the Federal Reserve (Fed) and the Bank of Japan (BoJ).

The Fed has maintained high interest rates to control inflation, but the market expects potential rate cuts by the end of 2025.

Meanwhile, the BoJ has raised interest rates for the first time after years of easing and may continue tightening in May if inflation remains elevated.

The Federal Reserve faces pressure in deciding the timing of two rate cuts within the remainder of 2025.

Although U.S. inflation has declined from its peak, the Fed remains cautious due to persistent core inflation and a strong labor market.

However, if economic data—particularly CPI and employment figures—show clear signs of weakening, the Fed may cut rates sooner than expected, possibly in the second half of 2025. This would weaken the USD and provide upward momentum for the JPY.

In contrast to the Fed, the Bank of Japan could raise interest rates in May if economic data continue to indicate sustained inflation.

Currently, Tokyo inflation is higher than expected, especially in food and consumer goods, increasing the likelihood of further monetary tightening by the BoJ. If the BoJ raises rates, the yield differential between Japan and the U.S. would narrow, attracting capital inflows into the JPY and putting downward pressure on USD/JPY.

The yield spread between U.S. and Japanese bonds continues to support USD/JPY at high levels. However, if U.S. bond yields decline due to expectations of Fed easing, the JPY could strengthen. On the other hand, if the BoJ continues raising rates, this could drive USD/JPY lower as investors seek better returns from the JPY.

U.S. trade policies, particularly import tariffs, could also have a strong impact on USD/JPY. If the U.S. imposes new tariffs on Japanese automobiles and industrial goods, it could reduce Japan’s exports, exert pressure on its economy, and weaken the JPY. However, tariffs could also weaken the U.S. economy, especially if trade partners retaliate, slowing growth. This might force the Fed to cut rates earlier, adding downside pressure on the USD.

Additionally, the impact of tariffs depends on financial market reactions. If investors worry about slower growth due to trade tensions, they may turn to safe-haven assets like the JPY, strengthening the currency. Conversely, if tariffs increase U.S. inflation, the Fed may maintain higher rates, helping the USD hold its strength against the JPY.

Upcoming economic data will be key in determining USD/JPY trends. Indicators such as Tokyo CPI, Japan’s GDP, and U.S. labor market data will serve as benchmarks for forecasting future monetary policy in both countries. If the BoJ signals a stronger commitment to tightening, the JPY could see significant recovery against the USD.